America's Changing Tastes: Income Growth and the Impact of Relative Price Changes on Age-Based Consumption Patterns

By Henry, LaVaughn | Economic Commentary (Cleveland), July 9, 2015 | Go to article overview

America's Changing Tastes: Income Growth and the Impact of Relative Price Changes on Age-Based Consumption Patterns


Henry, LaVaughn, Economic Commentary (Cleveland)


Economic researchers have long documented the relationship between age and patterns of consumption. In the standard model of saving and consumption, individuals borrow when they are young, save as they approach and live through middle age, and dis-save when they are old (Modigliani and Brumberg, 1954; Ando and Modigliani, 1963).

It is generally assumed that households with higher incomes and accumulated wealth will allocate a greater share of their disposable income to luxury consumption, relative to less wealthy households. Older age groups generally have higher levels of income and wealth and thus are more likely to be associated with greater degrees of luxury consumption than younger groups.1

During the Great Recession, income fell for most age groups, though by varying degrees. This analysis measures the impact of those decreases on the consumption habits of different age groups.2 In particular, it shows that the recession caused changes in both the absolute level of households' consumption as well as the relative shares of income going to purchase necessities and luxuries, and these changes differed by age group. It also shows that this shift occurred in spite of higher rates of price inflation for necessity goods relative to luxury items.

Income Growth

To gain insight into changes in real income and consumption patterns across different age groups, we explore data from the Bureau of Labor Statistics' annual Consumer Expenditure Survey (CES). The CES program consists of two surveys, conducted on an annual basis since 1984, which provide information on the buying habits of American consumers. CES data on income and consumption is provided in terms of "consumer units." These consumer units parallel households for most purposes and thus will be referred to as households throughout this analysis.3 Households are divided into six "age groups," determined by the age of the owner or renter of the housing unit: 16-24, 25-34, 35-44, 45-54, 55-64, and 65 and older.4

After adjusting the data for inflation,5 we see that all age groups experienced growth in their real incomes to differing degrees from 2000 to 2007, and then, with the exception of the oldest group, real incomes fell between 2007 and 2013 (figures 1 and 2). The greatest decline occurred in the youngest age group, those under 25 years old. Across all age groups, real pretax incomes rose at an average annualized rate of 2.4 percent in the pre-recession period and declined 1.5 percent in the recession and recovery period. With such large income changes, it is reasonable to expect that a significant change in consumption spending and composition also occurred.

Changing Levels and Types of Consumption

Changes in consumption patterns can be caused by myriad factors, but one way of thinking about them is in terms of what economists' call "income and substitution effects." The income effect refers to the fact that as households' incomes rise, their consumption increases (up to a point of satiation), while the substitution effect states that households' consumption patterns are affected by changes in the relative prices of goods. As prices rise for a given good, relative to the price of a substitutable good that provides a comparable level of satisfaction, households will switch to the less costly good when possible. These effects, either in whole or in part, may help explain the shifts in consumption patterns that have occurred across age groups.

Households also can reorder their consumption profiles based on the character of the good or service that is to be consumed. Specifically, households may change how much of a good or service they buy as their incomes and prices change, depending on whether they consider it a luxury or a necessity. In economics, a luxury item is a good or service for which demand increases more than proportionally as income rises. Necessity goods, by contrast, are goods for which demand increases proportionally less as income increases. …

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